Regulators riled by banks renting out QFII quotas

Hedge funds are still stuck in the QFII queue in China; although quotas are being raised, their chances of being favoured are slim. Meanwhile, regulators are fuming that banks holding QFII status are profiting from leasing out their quotas.
In many dimensions, a mainstay of AsiaÆs economies is the notion of the ærentseekerÆ - a person who owns, or thinks he owns, an entitlement to a revenue stream.

It can be something small, such as physically planting yourself within a parking space outside of the Tanamur nightclub in Jakarta and refusing to shift unless you are paid off. It can be large, such as the private Swiss vehicle ostensibly owned by nominees, (but whose beneficial ownership is unknown, though the name of the rentseeker is widely speculated upon); a corporate vehicle through which RussiaÆs offshore oil revenues are understood to pass.

So it is with ChinaÆs QFII (qualified foreign institutional investor) quotas.
Regulators seem headed towards adopting a more restrictive attitude about letting people rent out their quotas, either directly or in derivative form, via P-note style structures.

The regulators always knew this was going to happen, but they just canÆt help sulking from having been deprived of money that they feel is rightfully their entitlement, swiped by foreign bankers profiteering by renting out their quotas. (It also contravenes the unwritten schoolyard rule of 'thou shalt not mooch on another kid's racket').

The $10 billion QFII quota has been long-filled. That ceiling is being raised to $30 billion and the CSRC is starting to process applications again. Hedge funds shouldnÆt start salivating just yet though.

ôHedge funds managers have gotten stuck in the queue when applying for QFII by themselves,ö says Mark Shipman, partner at Hong Kong law firm Clifford Chance.

There were 86 QFII outstanding applications in the queue in February 2008 and about 10% of those were from hedge funds.

ôIn the short-term I donÆt think that hedge funds coming to China will receive any QFII quota," says James Wang, an executive director of UBS. "Over the longer term though, yes they might.ö

In an earlier draft of the new QFII arrangements, there was written the stipulation that quota not invested in securities could be forefeited. That restriction was eliminated from a later draft, and one could go into cash without the fear of the quota being nabbed.

ôIf your fund falls within the definition of an open-ended China fund (70% invested in A-shares)," adds Shipman, ôthen you can repatriate $50 million per month and not lose quota.ö

85% of QFII quotas were allotted to North American and European institutions. Lucky UBS and Morgan Stanley for example, have two QFII quotas each, one for asset management and one for investment banking. SAFE wants to diversify users and has shown signs of widening the scope. For example Korean-based funds have been given the thumbs up lately.

What would really get everyone over-excited though in this climate would be the Chinese stockmarkets shrugging off the present fumble and enjoying a sustained rally.
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